21/02/2012 (New Straits Times)  - Cooperative’s delegates to make crucial decision over listing exercise on Wednesday. Wednesday will be an important milestone in the much-talked-about journey to list Felda Global Ventures Holdings (FGVH).

On that day, some 1,200 delegates of Koperasi Permodalan Felda (KPF) will convene an extraordinary general meeting to decide on whether or not KPF will sell the 51 per cent stake that it owns in Felda Holdings Bhd (FHB) to FGVH.

The salient points of the listing of FGVH are as follows:

FGVH is a holding company which has signed a long-term land lease agreement with the Federal Government, which effectively makes it commercial beneficiary and operator of approximately 350,000ha of Federal Government-owned plantations land.

In addition, FGVH owns other lands, holds other businesses such as downstream subsidiaries and associates, a controlling stake in MSM Sugar (a listed entity) and, critically, a 49 per cent stake in FHB.

The latter is a group of companies by itself, which has been in existence since the 1980s. The main businesses of FHB are oil-palm milling operations, and various palm-oil-related logistics and downstream businesses, as well as a host of non-palm-related businesses such as rubber, cocoa, information technology and security services.

FGVH is now making an offer to buy the 51 per cent stake in FHB that is currently owned by KPF. This is to facilitate the group's internal restructuring plans, such as, potentially, to divest some of the non-core businesses in FHB.

Based on the information received by the 1,200 delegates, it seems that KPF is being made an extremely attractive offer, whereby they get to swap their 51 per cent stake in FHB with a 51 per cent stake in FGVH.

In other words, they would be swapping shares in an entity that not only owns mills, logistics assets and refineries, with equal percentage of shares in an entity that owns 100 per cent of the same assets, but on top of that, will have the profits from both the plantations lands and MSM Sugar.

The numbers are staggering. Through this transaction, KPF members (of which settler families account for 80 per cent) basically make a gain of around RM4 billion from the additional value that they are receiving above the fair value of their FHB shares.

Is the KPF EGM a foregone conclusion then? Would any delegate actually vote against the divestment?

Clearly, more complicated issues are at stake. One potential reason for the resistance is the fact that although, initially, KPF will own 51 per cent of FGVH, this stake will be diluted once FGVH issues new shares at the IPO.

Sources close to the deal say that after the IPO, KPF's stake will reduce to around 37 per cent, thereby making FGVH no longer a KPF subsidiary.

This would be a big issue with KPF, which currently prides itself as being one of the largest cooperatives in Malaysia by revenue, due to the fact that it currently consolidates, in its accounts, FHB's revenues of RM15 billion (2010).

Additionally, the fact that FHB is a subsidiary means that KPF currently has significant say in the running of the FHB companies. In a company that you control, you can set appointment of directors, directors' fees, management appointments and award of contracts.

Having control over a company is a very emotional matter, particularly for a group like Felda which has been in existence for more than 50 years.

However, subject to compliance to the necessary regulatory procedures, the government seems determined to proceed with the FGVH listing no matter what the outcome of the KPF EGM.

The economic merits of the listing stand true regardless of whether FGVH manages to acquire the 51 per cent stake in FHB.

As commercial beneficiary of 350,000ha of government land and with a 3.2-million-metric-tonne annual CPO production, FGVH should emerge as one of the top 10 Bursa companies by market capitalisation.

Its business model now allows for it to drive replanting and efficiency gains, which was limited in the past under the old business model. In preparation for the listing, FGVH has also regularised its inter-company dealings through arms-length contracts, which means it can still leverage the services of FHB companies, even if it does not own a controlling stake.

Prime Minister Datuk Seri Najib Razak, however, is known to be extremely sentimental about Felda -- his father's legacy -- and it is difficult to imagine that he would support a listing exercise in which the settlers are left out because of the outcome of the KPF EGM.

What is extremely interesting is, therefore, recent news from sources close to the deal, who say that there is commitment right from the top to ensure that the settlers receive the RM3 billion to RM4 billion in value, as long as the listing happens.

If KPF is not the conduit to receive this gain, some other structures can be explored, and it is learned that advisers have been asked to explore structures such as trust accounts or a foundation to manage the RM3 billion to RM4 billion on behalf of the settlers.

If this is the case, does it really matter then, if the KPF delegates reject the offer they have in front of them? Clearly it will matter to a certain extent to FGVH. Its market capitalisation, should the listing go through, is bound to be somewhat lower without 51 per cent of FHB.

However, the real impact will be  on KPF, who will continue to own shares in FHB rather than shares in the listed entity.

Moving forward, FGVH is bound to park its high-potential and high-growth businesses and projects in FGVH-controlled subsidiaries, rather than in FHB companies.

Therefore, at best, FHB income will stagnate (especially since FHB does not benefit from CPO upside) and potentially could even decline as FHB becomes less relevant to the FGVH group. KPF's stake in FHB accounts for 20 per cent of its invested fund size. However, it accounts for 50 per cent of the annual dividends that KPF pays out.

What KPF members may not be aware of is that the 15 per cent dividend  they have been enjoying from KPF has been at the expense of an increasingly higher dividend payout ratio from FHB.

Analyses of KPF annual reports and FHB financial returns indicate that in 2008, around 40 per cent of FHB's profits were dividened up to support KPF's dividends. In 2010, this had increased to 65 per cent.

This is clearly not sustainable. If KPF turns down this deal, a lot more will need to be done to increase KPF's income from its other investments to maintain its dividend yield as its fund size increases.

Wednesday  will, therefore, give interesting insights into the tussle between "control over a sentimental but small and potentially declining pie" versus "non-controlling investment in a much larger and growing pie".